DragonWave looks for best year yet on business with Nokia, Sprint

John Lawlor, vice-president of investor relations at Dragonwave Inc., says his company is set to have one of its best years on record.

The wireless backhaul company has been affected by its share of market turns and twists. After going public in 2007 at $3.95 per share, DragonWave’s stock climbed to a peak of $13.96 in early 2010. Analysts had glowing outlooks, citing the company’s contracts with U.S network giant Clearwire Corp.

But Clearwire ran out of money, and orders started being cut. As Clearwire’s orders accounted for 78 per cent of revenue, DragonWave’s money declined fast. Analysts reversed their outlooks, and DragonWave’s stock plummeted to $5.23 per share by July of that year.

It has been steadily declining since, occasionally dipping under $1 per share. As of Dec. 4, it was trading at approximately $1.20 per share on the TSX.

But Lawlor, who has been with the company almost five years, says he believes things are only going up from here. Though the company has been cash flow negative for many quarters now, Lawlor says there’s potential for that to change by the next quarter.

“We’ve said that in our fiscal fourth quarter, which starts (the week of Dec. 1), it’s our objective to achieve break even,” he says, adding that break even is the major hurdle to clear before becoming profitable.

The way to achieve that, Lawlor says, is strong revenue growth, and the way he believes DragonWave will achieve revenue growth is by differentiating its products from what everyone else offers.

Wireless backhaul consist of the links between network towers and the cables that constitute the backbone of the internet, says Gregory Taylor, a principal investigator at Canadian Spectrum Policy Research and postdoctoral fellow at Ryerson University.

“As I tell my students, wireless technology is a little bit of a misnomer. It always goes into a wire at some point,” Taylor says.

Right now a big concern in backhaul is the carrying capacity of networks. As demand for data and internet increases, old technologies in wireless backhaul may be creating bottlenecks.

“They’re looking at new technologies right now, ways to speed up that process from tower into the backbone of the internet,” he says.

And demand for carrying capacity is only increasing, says Marc Choma, director of communications for the Canadian Wireless Telecommunications Association. The wireless industry has fundamentally changed over the past few years, he says.

“The technology in wireless changes at lightning speed, but also in terms of usage … I don’t think anyone would have predicted (in 1985) where we’d be in 2014,” he says. “We have to be constantly expanding and upgrading those networks to meet how people want to use(them).”

Carrying capacity is what differentiates DragonWave’s products from its competitors, Lawlor says. The company achieves this through a feature called bulk compression, he says.

“We’re able to transmit a lot more data through the pipe, which no other microwave vendor offers,” he says.

DragonWave’s dependence on Clearwire for revenue in 2010 proved to be its biggest weakness. The company still relies on a single company for most of its revenue these days. Nokia, with which DragonWave has a strategic partnership, accounted for 61 per cent of revenue in the last fiscal quarter.

However, Lawlor says the two companies are very different. Clearwire was using DragonWave products almost exclusively for its plan to build, from scratch, a fourth-generation wireless network in the United States, and when it ran out of money, those orders stopped.

“The door slammed shut on their network build, and you saw the steep falloff in DragonWave revenue as a result of that,” he says.

Nokia, on the other hand, is partnering with DragonWave for a variety of customers, Lawlor says. Nokia’s marketing presence and brand value helps DragonWave get customers they otherwise would not be able to secure. Instead of one project, it’s multiple customers with different projects, all tied together by Nokia.

“Nokia has got between 5,000 and 6,000 salespersons. We could never do that. We can complement that,” Lawlor said.

Nokia also has a vested interest in seeing DragonWave succeed. The partnership between the two came to be when DragonWave bought Nokia Siemens Network’s microwave transport business.

While things have not looked good since Clearwire folded, the now-defunct company is still giving DragonWave some hope, as the company was acquired by Sprint Corp., which has continued the business relationship with DragonWave.

That business is also giving analysts hope for the future of DragonWave. In a research note on Nov. 25, CIBC analyst Todd Coupland rated DragonWave as a sector outperformer, citing the company’s contracts with Sprint. Coupland said the most recent orders are most likely part of Sprint’s plan to upgrade to 4G service, called Sprint Spark.

“Sprint Spark is just getting under way and is a major opportunity over several years. For context, upgrading the Sprint network would require up to 50,000 links for a value up to $250 million,” Coupland said in the note.

And if things go the way Coupland predicts, DragonWave could have its best year on record.